October 2006 Investment Report

Third-Quarter Earnings, Declining Oil Prices Boost the Markets

October markets responded well to favorable earnings and declining oil prices, sending the Dow Jones Industrial Average (an index of 30 large U.S. companies from various industries) above 12,000 for the first time and achieving an all-time high. With nearly 60% of S&P 500 companies reporting earnings at the end of the October, 257 companies met or exceeded analyst expectations. Only 42 of those reporting so far have reported earnings below expectations. Declining oil prices also helped support the markets, falling as low as $57.74 a barrel. Rising oil supplies and subsiding fears of supply disruption from politically volatile oil-producing nations such as Nigeria were factors resulting in the price decline.

Federal Reserve keeps interest rates unchanged …

… at 5.25% for the third consecutive meeting. The Fed had raised interest rates 17 consecutive times to combat rising inflation, but paused at the August meeting after data suggested a decline in the housing market and slower consumer spending. The Fed still remains on alert watching core inflation (prices excluding energy and food), which rose by 2.9% in September from year-ago levels. That is far above the Fed's comfort zone of 1-2% price increases. Still, the Fed issued a statement indicating their belief that their rate hikes are effectively slowing the economy to a moderate pace and taming inflation.

Sales of existing homes fall for sixth consecutive month …

… with the median annual sales price dropping by the largest amount on record, further documenting a lukewarm housing market. Housing, which had set sales records for both new and existing homes for five consecutive years, has been rapidly declining this year, as consumers were battered by rising mortgage rates, soaring energy prices and a slowing economy.

More acquisitions in the news …

… as Chicago Mercantile Exchange agreed to purchase the Chicago Board of Trade for about $8 billion and Google agreed to acquire YouTube for $1.6 billion.

North Korea conducts nuclear weapons test …

… creating more geopolitical unrest. Days later, the United Nations Security Council passed a resolution imposing sanctions on North Korea related to its nuclear and missile programs.

Fund Performance

All six of the General Board's funds produced positive investment returns in October, and all but one outperformed their respective performance benchmarks. For the year, all funds continue to produce positive returns with three funds outperforming benchmarks, two underperforming and one matching the performance of its benchmark (net of all fund management and administration fees).

The Inflation Protection Fund (IPF) advanced 0.2% and handily surpassed its benchmark return, which declined 0.2%. The excess performance resulted from the fund's diversification through foreign inflation-linked bonds and the fund's exposure to commodities. Both segments produced positive results, with the fund's 10% commodities position advancing nearly 2%. For the year, the fund is has gained 1.7%, which matches the performance of its benchmark. The fund's active inflation-linked bond manager has added value compared to its benchmark, and the fund's commodities exposure also added to returns. The gains from these two strategies, however, have been offset by the fund's management and administration fees.

The Domestic Bond Fund (DBF) recorded another excellent month and advanced 1.1% compared to the benchmark return of 0.7%. Once again, the fund benefited from its holdings in bonds denominated in currencies other than the U.S. dollar as the dollar weakened against most world currencies in October. Notably, the portion of the portfolio invested in government bonds of lesser developed countries increased in value by 3.7%. For the year, the DBF is now up 5.2% and has substantially outperformed its benchmark return of 3.9%. The performance of the fund continues to rank very high compared to comparable bond mutual funds. The primary contributors to this excess performance continue to be the fund's emerging market debt strategy and the fund's contribution from non-dollar denominated international bonds. The purpose of these strategies is to primarily provide diversification in the fund. Enhanced returns are a secondary objective. Should the U.S. dollar strengthen, or if the world enters a protracted recession, investment performance will suffer compared to the performance benchmark.

The Domestic Stock Fund advanced 3.7% in October and very slightly exceeded the performance of its benchmark. Continued declining interest rates resulting from signals from the Federal Reserve regarding future interest rate hikes, strong corporate earnings and continued relief from high oil prices were the major factors contributing to investors' continued enthusiasm for stocks. The stocks of small companies resumed their trend from earlier in the year and performed better than the stocks of larger companies. This had a positive impact on fund performance in October. Additionally, the fund's exposure to stocks of real estate investment trusts also helped performance. These positive contributors, however, were somewhat offset by generally collective below market performance by the fund's investment managers. For the year, the fund has gained 12.1% net of all fund expenses, which is 0.2% better than the performance of its benchmark. The fund's exposure to real estate has positively influenced performance, offset by the impact of fund management and administration expenses.

The International Stock Fund was the best performing fund on an absolute return basis and advanced 4.3% in October, which was 0.2% better compared to its performance benchmark. Five of the fund's six investment managers produced results better than their respective benchmarks. Although the fund has a string of months where it has performed better than its benchmark, its year to date performance continues to lag. However, the fund is the best performing General Board fund for the year and has provided participants with a return of 16.6%. The benchmark return for the same period is 18.6%. This relative performance differential is attributed to generally poor performance of the fund's investment managers compared to their respective performance benchmarks. Four of the fund's six managers have underperformed their respective benchmarks. This is primarily due to a less-than-market weighting in energy stocks, which have performed well and a greater-than-market weighting in technology stocks, which have performed poorly.

The Multiple Asset Fund gained 2.8% during September and surpassed its performance benchmark by 0.2%. The better-than-benchmark performance is attributable to better-than-market performance of all four underlying funds. For the year, the fund has produced a return of 10.3%, which is also 0.2% better than the benchmark. The relative performance of the Domestic Bond Fund and Domestic Stock Fund has positively impacted the fund's performance, while the relative performance of the International Stock Fund has detracted from performance.

The Balanced Social Values Plus Fund was the only General Board fund to produce a return less than its performance benchmark in October. The fund advanced 2.1% during the month compared to the benchmark return of 2.4%. Once again, the slight below market performance of the fund's stock manager detracted from performance. For the year, the fund is up 4.7%, but trails its benchmark return of 8.8% as a result of its emphasis on stocks expected to grow earnings faster than the overall economy. These stocks have generally underperformed the broad stock market.

Market Indices for October 2006

The S&P 500 index rose 3.1% in October and is up 10.3% for 2006.

The Russell 2000 index rose 5.69% in October and is up 13.9% for 2006.

The MSCI World ex-USA index rose 3.9% in October and is up 16.3% for 2006.

The performance data for these charts is based on price changes only and do not include the impact of dividend payments.